prepared by coby harmon university of california, santa...
TRANSCRIPT
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10-1
Prepared byCoby Harmon
University of California, Santa BarbaraWestmont College
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10-2
10Learning ObjectivesAfter studying this chapter, you should be able to:
[1] Describe how the historical cost principle applies to plant assets.[2] Explain the concept of depreciation and how to compute it.[3] Distinguish between revenue and capital expenditures, and explain
the entries for each.[4] Explain how to account for the disposal of a plant asset.[5] Compute periodic depletion of natural resources.[6] Explain the basic issues related to accounting for intangible assets.[7] Indicate how plant assets, natural resources, and intangible assets
are reported.
Plant Assets, Natural Resources, and Intangible Assets
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10-3
Preview of Chapter 10
Accounting PrinciplesEleventh Edition
Weygandt Kimmel Kieso
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10-4
Plant assets are resources that have
physical substance (a definite size and shape),
are used in the operations of a business,
are not intended for sale to customers,
are expected to provide service to the company for a number of years.
Referred to as property, plant, and equipment; plant and equipment; and fixed assets.
Plant Assets
LO 1 Describe how the cost principle applies to plant assets.
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10-5
Plant assets are critical to a company’s successIllustration 10-1
Plant Assets
LO 1 Describe how the cost principle applies to plant assets.
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10-6
Cost Principle - requires that companies record plant assets at cost.
Cost consists of all expenditures necessary to acquire an asset and make it ready for its intended use.
LO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Plant Assets
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10-7
All necessary costs incurred in making land ready for its intended use increase (debit) the Land account.
Costs typically include:
1) cash purchase price,
2) closing costs such as title and attorney’s fees,
3) real estate brokers’ commissions, and
4) accrued property taxes and other liens on the land assumed by the purchaser.
LO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
Land
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10-8
Illustration: Hayes Manufacturing Company acquires real estate at a cash cost of $100,000. The property contains an old warehouse that is razed at a net cost of $6,000 ($7,500 in costs less $1,500 proceeds from salvaged materials). Additional expenditures are the attorney’s fee, $1,000, and the real estate broker’s commission, $8,000.
Required: Determine the amount to be reported as the cost of the land.
LO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
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10-9
Land
Required: Determine amount to be reported as the cost of the land.
LO 1 Describe how the cost principle applies to plant assets.
Cash price of property ($100,000)
Net removal cost of warehouse ($6,000)
Attorney's fees ($1,000) 1,000
6,000
$100,000
$115,000Cost of Land
Real estate broker’s commission ($8,000) 8,000
Determining the Cost of Plant Assets
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10-10
Cost includes all expenditures necessary to make the improvements ready for their intended use.
Land Improvements
Examples: driveways, parking lots, fences, landscaping, and lighting.
Limited useful lives.
Expense (depreciate) the cost of land improvements over their useful lives.
LO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
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10-11
Includes all costs related directly to purchase or construction.
Buildings
Purchase costs: Purchase price, closing costs (attorney’s fees, title insurance,
etc.) and real estate broker’s commission.
Remodeling and replacing or repairing the roof, floors, electrical wiring, and plumbing.
Construction costs: Contract price plus payments for architects’ fees, building
permits, and excavation costs.
LO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
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10-12
Include all costs incurred in acquiring the equipment and preparing it for use.
Costs typically include:
Equipment
Cash purchase price.
Sales taxes.
Freight charges.
Insurance during transit paid by the purchaser.
Expenditures required in assembling, installing, and testing the unit.
LO 1 Describe how the cost principle applies to plant assets.
Determining the Cost of Plant Assets
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10-13
Illustration: Lenard Company purchases a delivery truck at a cash price of $22,000. Related expenditures are sales taxes $1,320, painting and lettering $500, motor vehicle license $80, and a three-year accident insurance policy $1,600. Compute the cost of the delivery truck.
LO 1 Describe how the cost principle applies to plant assets.
TruckCash priceSales taxes
Painting and lettering 500
1,320$22,000
$23,820Cost of Delivery Truck
Determining the Cost of Plant Assets
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10-14
Illustration: Lenard Company purchases a delivery truck at a cash price of $22,000. Related expenditures are sales taxes $1,320, painting and lettering $500, motor vehicle license $80, and a three-year accident insurance policy $1,600. Prepare the journal entry to record these costs.
LO 1 Describe how the cost principle applies to plant assets.
Equipment 23,820
License Expense 80
Prepaid Insurance 1,600
Cash 25,500
Determining the Cost of Plant Assets
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10-15
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10-16
Process of cost allocation, not asset valuation.
Applies to land improvements, buildings, and equipment, not land.
Depreciable, because the revenue-producing ability of asset will decline over the asset’s useful life.
Process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner.
LO 2 Explain the concept of depreciation.
Depreciation
Plant Assets
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10-17
Factors in Computing Depreciation
LO 2 Explain the concept of depreciation.
Illustration 10-6
Depreciation
Helpful Hint Depreciation expense is reported on the income statement. Accumulated depreciationis reported on the balance sheet as a deduction from plant assets.
Alternative TerminologyAnother term sometimes used for salvage value is residual value.
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10-18
Management selects the method it believes best measures an asset’s contribution to revenue over its useful life.
Depreciation Methods
Examples include:
(1) Straight-line method.
(2) Units-of-activity method.
(3) Declining-balance method.
LO 2
Illustration 10-8 Use of depreciation methods in major U.S. companies
Depreciation
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10-19
Illustration: Barb’s Florists purchased a small delivery truck on January 1, 2014.
Cost $13,000
Expected salvage value $1,000
Estimated useful life in years 5
Estimated useful life in miles 100,000
Required: Compute depreciation using the following.
(a) Straight-Line. (b) Units-of-Activity. (c) Declining Balance.
Depreciation
LO 2 Explain the concept of depreciation.
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10-20
Straight-Line Expense is same amount for each year.
Depreciable cost = Cost less salvage value.
Illustration 10-9
Depreciation
LO 2 Explain the concept of depreciation.
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10-21
Depreciable Annual Accum. BookYear Cost x Rate = Expense Deprec. Value
Illustration: (Straight-Line Method)
2014 $ 12,000 20% $ 2,400 $ 2,400 $ 10,600
2015 12,000 20 2,400 4,800 8,200
2016 12,000 20 2,400 7,200 5,800
2017 12,000 20 2,400 9,600 3,400
2018 12,000 20 2,400 12,000 1,000
2014 Journal Entry
Depreciation expense 2,400Accumulated depreciation 2,400
Illustration 9-10
Depreciation
LO 2 Explain the concept of depreciation.
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10-22 LO 2
CurrentDepreciable Annual Partial Year Accum.
Year Cost Rate Expense Year Expense Deprec.2014 12,000$ x 20% = 2,400$ x 9/12 = 1,800$ 1,800$ 2015 12,000 x 20% = 2,400 2,400 4,200 2016 12,000 x 20% = 2,400 2,400 6,600 2017 12,000 x 20% = 2,400 2,400 9,000 2018 12,000 x 20% = 2,400 2,400 11,400 2019 12,000 x 20% = 2,400 x 3/12 = 600 12,000
12,000$ Journal entry:2014 Depreciation expense 1,800
Accumulated depreciation 1,800
Assume the delivery truck was purchased on April 1, 2014.
Illustration: (Straight-Line Method)
Depreciation Partial Year
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10-23
Companies estimate total units of activity to calculate depreciation cost per unit.
Units-of-Activity
Illustration 10-11 Expense varies based
on units of activity.
Depreciable cost is cost less salvage value.
Depreciation
Alternative TerminologyAnother term often usedis the units-of-productionmethod.
LO 2 Explain the concept of depreciation.
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10-24
Miles Cost per Annual Accum. BookYear Driven x Unit = Expense Deprec. Value
Illustration: (Units-of-Activity Method)
2014 15,000 $ 0.12 $ 1,800 $ 1,800 $ 11,2002015 30,000 0.12 3,600 5,400 7,6002016 20,000 0.12 2,400 7,800 5,2002017 25,000 0.12 3,000 10,800 2,2002018 10,000 0.12 1,200 12,000 1,000
Depreciation expense 1,800Accumulated depreciation 1,800
2014 Journal Entry
Illustration 10-12
Depreciation
LO 2 Explain the concept of depreciation.
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10-25
Declining-Balance Accelerated method.
Decreasing annual depreciation expense over the asset’s useful life.
Twice the straight-line rate with Double-Declining-Balance.
Rate applied to book value.
Depreciation
Illustration 10-13
LO 2 Explain the concept of depreciation.
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10-26
DecliningBeginning Balance Annual Accum. Book
Year Book value x Rate = Expense Deprec. Value
Illustration: (Declining-Balance Method)
2014 13,000 40% $ 5,200 $ 5,200 $ 7,8002015 7,800 40 3,120 8,320 4,6802016 4,680 40 1,872 10,192 2,8082017 2,808 40 1,123 11,315 1,6852018 1,685 40 685* 12,000 1,000
* Computation of $674 ($1,685 x 40%) is adjusted to $685.
Depreciation expense 5,200Accumulated depreciation 5,200
2014 Journal Entry
Illustration 10-14
LO 2
Depreciation
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10-27
Declining CurrentBeginning Balance Annual Partial Year Accum.
Year Book Value Rate Expense Year Expense Deprec.2014 13,000$ x 40% = 5,200$ x 9/12 = 3,900$ 3,900$ 2015 9,100 x 40% = 3,640 3,640 7,540 2016 5,460 x 40% = 2,184 2,184 9,724 2017 3,276 x 40% = 1,310 1,310 11,034 2018 1,966 x 40% = 786 786 11,821 2019 1,179 x 40% = 472 Plug 179 12,000
12,000$ Journal entry:
2014 Depreciation expense 3,900 Accumulated depreciation 3,900
Illustration: (Declining-Balance Method)
Depreciation Partial Year
LO 2 Explain the concept of depreciation.
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10-28
Comparison of Methods
Illustration 10-15
Illustration 10-16
Each method is acceptable because each recognizes the
decline in service potential of the asset
in a rational and systematic manner.
LO 2
Depreciation
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10-29
IRS does not require taxpayer to use the same depreciation method on the tax return that is used in preparing financial statements.
IRS requires the straight-line method or a special accelerated-depreciation method called the Modified Accelerated Cost Recovery System (MACRS).
MACRS is NOT acceptable under GAAP.
Depreciation and Income Taxes
Depreciation
LO 2 Explain the concept of depreciation.
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10-30
Accounted for in the period of change and future periods (Change in Estimate).
Not handled retrospectively.
Not considered error.
Revising Periodic Depreciation
Depreciation
LO 2 Explain the concept of depreciation.
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10-31
Illustration: Arcadia HS, purchased equipment for $510,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been recorded for 7 years on a straight-line basis. In 2014 (year 8), it is determined that the total estimated life should be 15 years with a salvage value of $5,000 at the end of that time.
No Entry Required
Questions: What is the journal entry to correct the
prior years’ depreciation?
Calculate the depreciation expense for 2014.
Depreciation
LO 2 Explain the concept of depreciation.
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10-32
Equipment $510,000Plant Assets:
Accumulated depreciation 350,000Net book value (NBV) $160,000
Balance Sheet (Dec. 31, 2014)
After 7 years
Equipment cost $510,000Salvage value - 10,000Depreciable base 500,000Useful life (original) 10 yearsAnnual depreciation $ 50,000 x 7 years = $350,000
First, establish NBV at date of change in
estimate.
Depreciation
LO 2 Explain the concept of depreciation.
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10-33
Depreciation Expense calculation
for 2014.
Depreciation Expense 19,375Accumulated Depreciation 19,375
Journal entry for 2014 and future years.
Depreciation
LO 2 Explain the concept of depreciation.
After 7 years
Net book value $160,000Salvage value (new) - 5,000Depreciable base 155,000Useful life remaining 8 yearsAnnual depreciation $ 19,375
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10-34
Ordinary Repairs - expenditures to maintain the operating efficiency and productive life of the unit.
Debit - Repair (or Maintenance) Expense.
Referred to as revenue expenditures.
Additions and Improvements - costs incurred to increase the operating efficiency, productive capacity, or useful life of a plant asset.
Debit - the plant asset affected.
Referred to as capital expenditures.
LO 3 Distinguish between revenue and capital expenditures, and explain the entries for each.
Expenditures During Useful Life
Plant Assets
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10-35
THE MISSING CONTROLSDocumentation procedures. The company’s accounting system was a disorganized collection of non-integrated systems, which resulted from a series of corporate acquisitions. Top management took advantage of this disorganization to conceal its fraudulent activities.Independent internal verification. A fraud of this size should have been detected by a routine comparison of the actual physical assets with the list of physical assets shown in the accounting records.
Total take: $7 billion
ANATOMY OF A FRAUD
Bernie Ebers was the founder and CEO of the phone company WorldCom. Thecompany engaged in a series of increasingly large, debt-financed acquisitions of other companies. These acquisitions made the company grow quickly, which made the stock price increase dramatically. However, because the acquired companies all had different accounting systems, WorldCom’s financial records were a mess. When WorldCom’s performance started to flatten out, Bernie coerced WorldCom’s accountants to engage in a number of fraudulent activities to make net income look better than it really was and thus prop up the stock price. One of these frauds involved treating $7 billion of line costs as capital expenditures. The line costs, which were rental fees paid to other phone companies to use their phone lines, had always been properly expensed in previous years. Capitalization delayed expense recognition to future periods and thus boosted current-period profits.
Advance slide in presentation mode to reveal answer.
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10-36
Companies dispose of plant assets in three ways —Retirement, Sale, or Exchange (appendix).
LO 4 Explain how to account for the disposal of a plant asset.
Record depreciation up to the date of disposal.
Eliminate asset by (1) debiting Accumulated Depreciation, and (2) crediting the asset account.
Illustration 10-18
Plant Asset Disposals
Plant Asset Disposals
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10-37
Retirement of Plant Assets
LO 4 Explain how to account for the disposal of a plant asset.
No cash is received.
Decrease (debit) Accumulated Depreciation for the full amount of depreciation taken over the life of the asset.
Decrease (credit) the asset account for the original cost of the asset.
Plant Asset Disposals
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Illustration: Hobart Enterprises retires its computer printers, which cost $32,000. The accumulated depreciation on these printers is $32,000. Prepare the entry to record this retirement.
LO 4 Explain how to account for the disposal of a plant asset.
Accumulated Depreciation 32,000
Equipment 32,000
Question: What happens if a fully depreciated plant asset is still useful to the company?
Plant Asset Disposals
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Illustration: Sunset Company discards delivery equipment that cost $18,000 and has accumulated depreciation of $14,000. The journal entry is?
LO 4 Explain how to account for the disposal of a plant asset.
Accumulated Depreciation 14,000Loss on Disposal 4,000
Companies report a loss on disposal in the “Other expenses and losses” section of the income statement.
Equipment 18,000
Plant Asset Disposals
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Compare the book value of the asset with the proceeds received from the sale.
If proceeds exceed the book value, a gain on disposal occurs.
If proceeds are less than the book value, a loss on disposal occurs.
LO 4 Explain how to account for the disposal of a plant asset.
Plant Asset Disposals
Sale of Plant Assets
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Illustration: On July 1, 2014, Wright Company sells office furniture for $16,000 cash. The office furniture originally cost $60,000. As of January 1, 2014, it had accumulated depreciation of $41,000. Depreciation for the first six months of 2014 is $8,000. Prepare the journal entry to record depreciation expense up to the date of sale.
LO 4 Explain how to account for the disposal of a plant asset.
Depreciation Expense 8,000
Accumulated Depreciation 8,000
July 1
Plant Asset Disposals
Gain on Sale
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Illustration: Wright records the sale as follows.
LO 4 Explain how to account for the disposal of a plant asset.
Cash 16,000Accumulated Depreciation 49,000
Illustration 10-19Computation of gain on disposal
Equipment 60,000Gain on Disposal 5,000
July 1
Plant Asset Disposals
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10-43 LO 4 Explain how to account for the disposal of a plant asset.
Cash 9,000Accumulated Depreciation 49,000
Illustration 10-20Computation of loss on disposal
Equipment 60,000Loss on Disposal 2,000
July 1
Illustration: Assume that instead of selling the office furniture for $16,000, Wright sells it for $9,000.
Plant Asset Disposals
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Physically extracted in operations.
Replaceable only by an act of nature.
Natural resources consist of standing timber and underground deposits of oil, gas, and minerals.
Distinguishing characteristics:
Natural Resources
LO 5 Compute periodic depletion of natural resources.
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Depletion is to natural resources as depreciation is to plant assets.
Companies generally use units-of-activity method.
Depletion generally is a function of the units extracted and sold.
Cost - price needed to acquire the resource and prepare it for its intended use.
LO 5 Compute periodic depletion of natural resources.
Natural Resources
The allocation of the cost to expense in a rational and systematic manner over the resource’s useful life.
Depletion
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Illustration: Lane Coal Company invests $5 million in a mine estimated to have 10 million tons of coal and no salvage value. In the first year, Lane extracts and sells 800,000 tons of coal. Lane computes the depletion expense as follows:
LO 5 Compute periodic depletion of natural resources.
$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton
$.50 x 800,000 = $400,000 depletion expense
Depletion expense 400,000Accumulated Depletion 400,000
Journal entry:
Natural Resources
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10-47 LO 5 Compute periodic depletion of natural resources.
Illustration 10-22Statement presentation of accumulated depletion
Extracted resources that have not been sold are reported as inventory in the current assets section.
Natural Resources
Depletion
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Intangible assets are rights, privileges, and competitive advantages that result from ownership of long-lived assets that do not possess physical substance.
Patents
Copyrights
Goodwill
Trademarks and Trade Names
Franchises or Licenses
Limited life or indefinite life.
Common types of intangibles:
Intangible Assets
LO 6 Explain the basic issues related to accounting for intangible assets.
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Limited-Life Intangibles:
Amortize to expense.
Credit asset account.
Indefinite-Life Intangibles:
No foreseeable limit on time the asset is expected to provide cash flows.
No amortization.
LO 6 Explain the basic issues related to accounting for intangible assets.
Accounting for Intangible Assets
Helpful Hint Amortizationis to intangibles whatdepreciation is to plantassets and depletion is tonatural resources.
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Patents Exclusive right to manufacture, sell, or otherwise control an
invention for a period of 20 years from the date of the grant.
Capitalize costs of purchasing a patent and amortize over its 20-year life or its useful life, whichever is shorter.
Expense any R&D costs in developing a patent.
Legal fees incurred successfully defending a patent are capitalized to Patent account.
Accounting for Intangible Assets
LO 6 Explain the basic issues related to accounting for intangible assets.
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Illustration: National Labs purchases a patent at a cost of $60,000 on June 30. National estimates the useful life of the patent to be eight years. Prepare the journal entry to record the amortization for the six-month period ended December 31.
Amortization Expense 3,750Patent 3,750
Cost $60,000Useful life ÷ 8Annual expense $ 7,5006 months x 6/12Amortization $ 3,750
Dec. 31
LO 6
Accounting for Intangible Assets
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Copyrights Give the owner the exclusive right to reproduce and sell
an artistic or published work.
Granted for the life of the creator plus 70 years.
Capitalize costs of acquiring and defending it.
Amortized to expense over useful life.
Accounting for Intangible Assets
LO 6 Explain the basic issues related to accounting for intangible assets.
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Trademarks and Trade Names Word, phrase, jingle, or symbol that identifies a
particular enterprise or product.
► Wheaties, Monopoly, Kleenex, Coca-Cola, Big Mac, and Jeep.
Legal protection for indefinite number of 20 year renewal periods.
Capitalize acquisition costs.
No amortization.
Accounting for Intangible Assets
LO 6 Explain the basic issues related to accounting for intangible assets.
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Franchises and Licenses Contractual arrangement between a franchisor and a
franchisee.
► Shell, Subway, and Rent-A-Wreck are franchises.
Franchise (or license) with a limited life should be amortized to expense over the life of the franchise.
Franchise with an indefinite life should be carried at cost and not amortized.
Accounting for Intangible Assets
LO 6 Explain the basic issues related to accounting for intangible assets.
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Goodwill Includes exceptional management, desirable location, good
customer relations, skilled employees, high-quality products, etc.
Only recorded when an entire business is purchased.
Goodwill is recorded as the excess of purchase price over the FMV of the identifiable net assets acquired.
Internally created goodwill should not be capitalized.
Not amortized.
Accounting for Intangible Assets
LO 6 Explain the basic issues related to accounting for intangible assets.
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Research and Development CostsExpenditures that may lead to
patents,
copyrights,
new processes, and
new products.
All R & D costs are expensed
when incurred.
Accounting for Intangible Assets
Helpful Hint Research anddevelopment (R&D) costsare not intangible assets.But because they may leadto patents and copyrights,we discuss them in thissection.
LO 6 Explain the basic issues related to accounting for intangible assets.
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1. The allocation of the cost of a natural resource to expense in a rational and systematic manner.
2. Rights, privileges, and competitive advantages that result from the ownership of long-lived assets that do not possess physical substance.
3. An exclusive right granted by the federal government to reproduce and sell an artistic or published work.
Depletion
Intangible Assets
Copyrights
Illustration: Identify the term most directly associated with each statement.
LO 6 Explain the basic issues related to accounting for intangible assets.
DO IT!>
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Illustration: Identify the term most directly associated with each statement.
4. A right to sell certain products or services or to use certain trademarks or trade names within a designated geographic area.
5. Costs incurred by a company that often lead to patents or new products. These costs must be expensed as incurred.
Franchise
Research and Development
Costs
LO 6 Explain the basic issues related to accounting for intangible assets.
DO IT!>
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Presentation
LO 7 Indicate how plant assets, natural resources, and intangible assets are reported.
Statement Presentation and Analysis
Illustration 10-23
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Each dollar invested in assets produced $0.62 in sales. If a company is using its assets efficiently, each dollar of assets will create a high amount of sales.
Illustration 10-25
LO 7 Indicate how plant assets, natural resources, and intangible assets are reported.
Analysis
Statement Presentation and Analysis
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Ordinarily, companies record a gain or loss on the exchange of plant assets.
Most exchanges have commercial substance.
Commercial substance - if the future cash flows change as a result of the exchange.
LO 8 Explain how to account for the exchange of plant assets.
APPENDIX 10A Exchange of Plant Assets
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Cost of old trucks $64,000Less: Accumulated depreciation 22,000Book value 42,000Fair market value of old trucks 26,000Loss on disposal $16,000
Fair market value of old trucks $26,000Cash paid 17,000Cost of new truck $43,000
Illustration: Roland Co. exchanged old trucks (cost $64,000 less $22,000 accumulated depreciation) plus cash of $17,000 for a new semi-truck. The old trucks had a fair market value of $26,000.
LO 8 Explain how to account for the exchange of plant assets.
Illustration 10A-1 & 10A-2
APPENDIX 10A Exchange of Plant Assets
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Illustration: Roland Co. exchanged old trucks (cost $64,000 less $22,000 accumulated depreciation) plus cash of $17,000 for a new semi-truck. The old trucks had a fair market value of $26,000.
Prepare the entry to record the exchange of assets by Roland Co.
LO 8 Explain how to account for the exchange of plant assets.
Equipment (new) 43,000
Accumulated Depreciation 22,000
Loss on Disposal 16,000
Equipment (old) 64,000
Cash 17,000
APPENDIX 10A Exchange of Plant Assets
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10-65 LO 8 Explain how to account for the exchange of plant assets.
Cost of old equipment $40,000Less: Accumulated depreciation 28,000Book value 12,000Fair market value of old equipment 19,000Gain on disposal $ 7,000
Fair market value of old equipment $19,000Cash paid 3,000Cost of new equipment $22,000
Illustration 10A-3 & 10A-4
APPENDIX 10A Exchange of Plant Assets
Illustration: Mark Express Delivery trades its old delivery equipment (cost $40,000 less $28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of $19,000. Mark also paid $3,000.
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10-66 LO 8 Explain how to account for the exchange of plant assets.
Equipment (new) 22,000
Accumulated Depreciation 28,000
Equipment (used) 40,000
Gain on Disposal 7,000
Cash 3,000
APPENDIX 10A Exchange of Plant Assets
Illustration: Mark Express Delivery trades its old delivery equipment (cost $40,000 less $28,000 accumulated depreciation) for new delivery equipment. The old equipment had a fair market value of $19,000. Mark also paid $3,000.
Prepare the entry to record the exchange of assets by Mark Express.
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The definition for plant assets for both IFRS and GAAP is essentially the same.
Both IFRS and GAAP follow the historical cost principle when accounting for property, plant, and equipment at date of acquisition.
Under both IFRS and GAAP, interest costs incurred during construction are capitalized. Recently, IFRS converged to GAAP requirements in this area.
IFRS, like GAAP, capitalizes all direct costs in self-constructed assets such as raw materials and labor. IFRS does not address the capitalization of fixed overhead although in practice these costs are generally capitalized.
Key Points
A Look at IFRS
LO 9 Compare the accounting procedures for long-lived assets under GAAP and IFRS.
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Key Points
A Look at IFRS
LO 9 Compare the accounting procedures for long-lived assets under GAAP and IFRS.
IFRS also views depreciation as an allocation of cost over an asset’s useful life. IFRS permits the same depreciation methods (e.g., straight-line, accelerated, and units-of-activity) as GAAP. However, a major difference is that IFRS requires component depreciation. Component depreciation specifies that any significant parts of a depreciable asset that have different estimated useful lives should be separately depreciated. Component depreciation is allowed under GAAP but is seldom used.
IFRS uses the term residual value rather than salvage value to refer to an owner’s estimate of an asset’s value at the end of its useful life for that owner.
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Key Points
A Look at IFRS
LO 9 Compare the accounting procedures for long-lived assets under GAAP and IFRS.
IFRS allows companies to revalue plant assets to fair value at the reporting date. Companies that choose to use the revaluation framework must follow revaluation procedures. If revaluation is used, it must be applied to all assets in a class of assets. Assets that are experiencing rapid price changes must be revalued on an annual basis, otherwise less frequent revaluation is acceptable.
Under both GAAP and IFRS, changes in the depreciation method used and changes in useful life are handled in current and future periods. Prior periods are not affected. GAAP recently conformed to international standards in the accounting for changes in depreciation methods.
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Key Points
A Look at IFRS
LO 9 Compare the accounting procedures for long-lived assets under GAAP and IFRS.
The accounting for subsequent expenditures, such as ordinary repairs and additions, are essentially the same under IFRS and GAAP.
The accounting for plant asset disposals is essentially the same under IFRS and GAAP.
Initial costs to acquire natural resources are essentially the same under IFRS and GAAP.
The definition of intangible assets is essentially the same under IFRS and GAAP.
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Key Points
A Look at IFRS
LO 9 Compare the accounting procedures for long-lived assets under GAAP and IFRS.
As in GAAP, under IFRS the costs associated with research and development are segregated into the two components. Costs in the research phase are always expensed under both IFRS and GAAP. Under IFRS, however, costs in the development phase are capitalized as Development Costs once technological feasibility is achieved.
IFRS permits revaluation of intangible assets (except for goodwill). GAAP prohibits revaluation of intangible assets.
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Key Points
A Look at IFRS
LO 9 Compare the accounting procedures for long-lived assets under GAAP and IFRS.
IFRS requires an impairment test at each reporting date for plant assets and intangibles and records an impairment if the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell or its value-in-use. Value-in-use is the future cash flows to be derived from the particular asset, discounted to present value. Under GAAP, impairment loss is measured as the excess of the carrying amount over the asset’s fair value.
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Key Points
A Look at IFRS
LO 9 Compare the accounting procedures for long-lived assets under GAAP and IFRS.
IFRS allows reversal of impairment losses when there has been a change in economic conditions or in the expected use of the asset. Under GAAP, impairment losses cannot be reversed for assets to be held and used; the impairment loss results in a new cost basis for the asset. IFRS and GAAP are similar in the accounting for impairments of assets held for disposal.
The accounting for exchanges of nonmonetary assets has recently converged between IFRS and GAAP. GAAP now requires that gains on exchanges of nonmonetary assets be recognized if the exchange has commercial substance. This is the same framework used in IFRS.
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Looking to the Future
A Look at IFRS
It is too early to say whether a converged conceptual framework will recommend fair value measurement (and revaluation accounting) for plant assets and intangibles. The IASB and FASB have identified a project that would consider expanded recognition of internally generated intangible assets. IFRS permits more recognition of intangibles compared to GAAP. Thus, it will be challenging to develop converged standards for intangible assets, given the long-standing prohibition on capitalizing internally generated intangible assets and research and development costs in GAAP.
LO 9 Compare the accounting procedures for long-lived assets under GAAP and IFRS.
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Which of the following statements is correct?
a) Both IFRS and GAAP permit revaluation of property, plant, and equipment and intangible assets (except for goodwill).
b) IFRS permits revaluation of property, plant, and equipment and intangible assets (except for goodwill).
c) Both IFRS and GAAP permit revaluation of property, plant, and equipment but not intangible assets.
d) GAAP permits revaluation of property, plant, and equipment but not intangible assets.
A Look at IFRS
IFRS Self-Test Questions
LO 9 Compare the accounting procedures for long-lived assets under GAAP and IFRS.
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Research and development costs are:
a) expensed under GAAP.
b) expensed under IFRS.
c) expensed under both GAAP and IFRS.
d) None of the above.
A Look at IFRS
IFRS Self-Test Questions
LO 9 Compare the accounting procedures for long-lived assets under GAAP and IFRS.
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A Look at IFRS
IFRS Self-Test QuestionsUnder IFRS, value-in-use is defined as:
a) net realizable value.
b) fair value.
c) future cash flows discounted to present value.
d) total future undiscounted cash flows.
LO 9 Compare the accounting procedures for long-lived assets under GAAP and IFRS.
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